(Update: Lemonade continues its rollout to now 8 states – see map above. Added info about their first year GiveBack results and their new $0 deductible option. Get a free quote from Lemonade and see if they are cheaper than your current homeowner’s or renter’s insurance policy. Feel free to leave a comment about whether they were more or less expensive at the same coverage and deductible level.)

Right or wrong, many people view insurance companies with suspicion. Even though you pay them money every month for protection, you worry if you’ll actually get paid when you experience a problem. The problem is that with most insurance companies, every dollar they don’t pay you ends up in their pocket. The incentives are not aligned. Will they find a reason to deny your claim? Will they make it such a pain that you’ll just give up? Recall the Insuricare scene from the movie The Incredibles.

Lemonade is a new insurance company that takes a flat cut upfront, and the rest is put aside to payout claims. They are starting out with homeowner’s and renter’s insurance. The specific breakdown is below.

20% to Lemonade.

40% into a pool to pay out for claims (or charity).

40% to reinsurance in case that pool is exhausted (catastrophic cases).

Reinsurance is basically what is sounds like – insurance for insurance companies. This provides additional safety that there will be money to pay out your claim in cases of catastrophic losses (i.e. certain natural disasters). Examples of reinsurance companies are Lloyd’s of London and Berkshire Hathaway.

If there are fewer claims than expected, Lemonade will donate the money to a charity of your choice. Therefore, they have no direct incentive to deny a valid claim. In turn, hopefully their customers will also not make false claims because they will only be taking money away from charities and not the big bad insurance company. When signing up, you even take a “honesty pledge”. Here’s how behavioral economist Dan Ariely, who is their “Chief Behavioral Officer”, puts it:

Knowing that every dollar denied to you in claims is a dollar more to your insurer, brings out the worst in us all… Since we don’t pocket unclaimed money, we can be trusted to pay claims fast and hassle-free. As for our customers, knowing fraud harms a cause they believe in, rather than an insurance company they don’t, brings out their better nature too. Everyone wins.

Lemonade is also structured as a Public Benefit Corporation (B-Corp), which makes it the “World’s Only Public Benefit Insurance Company”.

Update: In July 2017, TechCrunch reported that Lemonade made its first annual donation of $53,174 or 10.2% of first year revenues. So that’s 10% out of the 40% pool reserved for claims (or charity).

Lemonade also saves money with tech start-up tricks. No human salespeople. No brokers. No physical branches. Apply online. File your claim online. You can do nearly everything via smartphone app (iOS and Android) with a chat-based AI interface. (Fewer adjusters and customer service reps.) If you have to file a claim, you can take a video of the damage using their app and explain the situation.

It remains to be seen if they can truly disrupt the industry. In the meantime, they need competitive premiums. Uber would not be so successful if they weren’t also cheaper than traditional taxis.

Live Policy and Zero-deductible option. In September 2017, Lemonade rolled out a new option with a zero deductible. If you pick this option, you won’t have to pay any deductible and thus get the full value of even a smaller claim like a $250 bike or smartphone. Importantly, Lemonade also promises not to hike your premium after making a claim (you are limited to two claims per year). You can preview how much this option changes your premium with their “Live Policy” system where you can make changes to your policy instantly via the Lemonade app. So far, it has rolled out to CA, NV, TX, IL, OH, and RI, where it will first be available for renters and condo policyholders

As of December 2017, Lemonade is now available in the states of California, Nevada, Texas, Illinois, Ohio, New York, New Jersey, and Rhode Island. Lemonade has has filed for licenses to operate in 46 states and the District of Columbia. Get a free online quote from Lemonade and compare with what you have now. Prices start at $35 $25 a month for homeowner’s insurance and $5 a month for renter’s insurance.

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That sounds like an awesome premise – I suppose it’s too much to ask that we get to claim the tax deduction on the charitable donation as well but I love the idea anyway. 🙂 I hope they’re successful and make it out to California.

Sounds good in theory, but even Lemonade will likely be forced to “review with suspicion” any claim made in order to prevent the initial pool from being exhausted pre-hazardous claim pool – otherwise their reinsurance rates would be through the roof.

Every insurance company, whether Lemonade or some other one, will evaluate a claim made first with whether it should be denied.

While it is a nice marketing story, Mutual Insurance Companies (ex: State Farm) exist for the sole purpose of serving their customers. Any “profit” generated is used for two purposes (1) dividends to policyholders (aka the owners) or (2) building up capital to ensure they have enough money to pay claims. State insurance departments strictly regulate capital levels.

Lemonade is simply using the reinsurance to reduce the amount of “capital” that they would need to write business.

Furthermore, the idea that they have eliminated the incentive to underpay claims is false.
1) if their loss ratio exceeds 80%, they are going to lose money
2) if their loss ratio is > than expected, their reinsurance costs will skyrocket.

Finally, companies like State Farm, USAA, and Nationwide benefit from economies of scale and decades of experience. Lemonade will struggle to keep expenses down.

I am not an insurance expert, but which mutual insurance companies provide dividends for homeowner’s and renter’s insurance? I know some car insurance companies do, but the from a quick Google search, the last time State Farm paid auto insurance dividends was 2007. I’ve had State Farm homeowner’s insurance for the last decade and don’t remember any dividend checks. It appears that USAA has a better record of paying out dividends for car insurance, but I also couldn’t find any announcements about home insurance.

If there are mutual fund companies that pay out dividends on homeowner’s and renter’s insurance, it would be interesting to see the numbers.

1) Most mutual insurance companies offer both homeowners and auto insurance. I don’t know of any that would issue a “homeowners-only” dividend.

2) Becuase interest rates have been extremely low the past few years, insurance companies have struggled to make enough investment income to subsidize their underwriting operations. With competition limiting price increases, there hasn’t been a lot of profit in the industry for a few years now. The lack of dividends is not surprising.

In terms of how they decide which policyholders get paid and how much they are paid, I have no idea. I suspect their Board decides but note that State Farm Mutual Auto is the “parent” company and dividends seem to flow to their Auto customers.

Although I don’t know of any, I would be surprised if there are not Mutual insurance Companies out there who only write Homeowners.

USAA’s dividend depends on when and how the member joined and what company is providing the insurance product. (USAA is really an umbrella of many, interrelated insurance and financial services companies.) Some groups (officers in the 70’s, for instance) get a dividend on all insurance products, others get a dividend on only auto insurance, and others don’t get any dividend.

I have been using them for 4 months now in long island city, nyc. cheaper rates than i could find elsewhere, state farm, nationwide, assurant, travelers. they have been very prompt on responses to all my questions thus far. more competition cant be a bad thing for the consumer

NO NO NO NO AND NO . Take note, most positive reviews are from those who don’t actually use this garbage excuse for an insurance company. I was just told that items that were stolen from me while traveling WERE NOT COVERED . A similar situation happened unfortunately a few years ago , and Allstate cut me a check within 24 hours. To add insult to injury, they do not have a phone number, so you are stuck dealing with bots and sending messages through their app – not even a website… THEIR APP. For sure its cheap and easy to sign up , but when the sh*t hits the fan, YOU WILL NOT HAVE ANY PROTECTION . Somehow I received no copy of my policy, anywhere during signup .

Research the company before getting policy. They have horrible claim process and doesn’t pay out in 3 minutes. Not even 4 weeks. They will say ooh we will pay you in 24 hours. I call. I email. No response. then 3 weeks later, we need more information and we need to inspect property. I already replaced everything and fixed everything. Then I call to speak to worker. He had an attitude and asked if I’m black. I said let me speak to supervisor. He said I’m the supervisor. He hung up and he continued to call and email me when I final stated I will call the police if you don’t stop contacting me. Thanks anyway fake insurance

If you really had that much of an issue, most states have laws as it relates to bad faith denial of an insurance claim. Look it up/talk to an attorney, especially if it’s a significant amount.

Generally you see it with auto accidents (ie catastrophic personal injuries) but it also happens sometime with homeowners (think Hurricane Katrina). Basically, if you make an insurance claim pursuant to the law’s details in your state, the company denies it, and you sue them and prove that it was a valid claim, you generally will recover your claim, attorney’s fees, and a punitive damage.

This is part of the reason I’m suspicious of this company – if they go lean on the claims department, they will end up getting stuck with a lot of bad faith denial of coverage lawsuits.

Good question. I contacted Lemonade and this was their reply. If there are more than two claims a year, the third claim (and subsequently thereafter) will automatically have a $250 deductible tied to it, and upon renewal, this third claim will be counted towards a possible rate hike.

Thanks for the suggestion. I just submitted a quote for renters insurance and received a quote of $9/month. My current insurance (Liberty Mutual) is charging $15/mo for equivalent insurance. I’ll give it a try in spite of the several negative experiences above and will report any problems I experience. I received the policy instantly via email.

I imagine they save some money on overhead without as many agents and offices. This could account for the problems contacting customer service and getting claims processed expeditiously.

Dangerous terms and conditions from Lemonade, they can alter anything anytime and you’re screwed.

We reserve the right, at our discretion, to modify these Terms from time to time, which modification will be effective upon the posting of the modification to our App/website (collectively, “the App”), and will apply to causes of action arising after the effective date of the change. You should continue to check the App for changes. Your continued use of our App or otherwise the Services following the posting of changes to these Terms will mean that you accept those changes.

Insurance is a highly-regulated industry. I’m also annoyed by the boilerplate fine print for stuff in general, but an insurance company certainly can’t “alter anything anytime” in regards to your policy.

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Rates and terms set on third-party websites are subject to change without notice. Per FTC guidelines, MyMoneyBlog.com has financial relationships with the merchants mentioned. MyMoneyBlog.com is compensated if visitors click on any outbound links and generate sales for the said merchant.

The editorial content on this site is not provided by the companies whose products are featured. Any opinions, analyses, reviews or evaluations provided here are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the Advertiser.